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Top Secret Trick to Technical Analysis Breakouts Most People Don’t Watch Ep 227

The truth is when it comes to technical analysis that there’s no magic formula, some golden egg, or silver bullet.

It’s all about knowing and understanding how stocks move and behave and understanding that behavior. That’s like your friend that always shows up late for dinner. He’s probably going to show up late for dinner next week as well.

Pro tip: Looking at the behavior, you get to see and understand some trends and patterns. Focus on that.

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With this, what I want to do is share with you some thoughts and ideas about something that’s overlooked. And that’s why I like to call it a secret. But the reality of it is that it is just something that most people overlook.

Technical Analysis Breakouts – Wide Price Spread

No matter what you notice or learn, you should still take into account chart patterns, volume, and the trend and behavior (the way the stock moves). All these things are working together.

However, this one thing is probably something that you’re overlooking. And that one thing is WIDE PRICE SPREAD.

That’s what we’re going to get into today. I’m going to share with you this concept because a lot of people overlook it. They don’t understand it. They don’t understand the point behind it. They assume every bar is equal when, in reality, some bars are worth more weight than other bars.

It’s like an understanding when the stock is topping out. You’re learning to read some signs and signals. But those things are tough to decipher because there are individual days.

What is the price spread?

When we look at a wide price spread, it’s much more significant.

The price spread: All it means is from the low of a bar to the high of the bar; it’s wide. That’s what wide price spread is (you can see arrows). There you can see a wide price spread candle.

We’re looking for wide price spread candles. And the whole reason behind this is because there’s more significance to it. It means that someone stepped on the gas. Someone put the pedal to the metal, and they’re buying a whole bunch of stock. Or in reverse, if a stock is selling off, they’re dumping a whole bunch of stock.

If we look stock like Boeing, and we look at this bar right here, they’re dumping a whole bunch of stock.

That’s a wide price spread from top to bottom. This one retraced a bit, but overall, that bar is fairly significant. That means it’s important.

Take a look at Johnson & Johnson.

We look at this wide price spread bar. Look how significant that is. That’s very significant because all that time for the last four months, it’s been taking that stock just to get to halfway – it took it for months.

That’s what we’re looking at. It’s important because it’s a huge amount of energy and all the stocks have a lot of energy. If you have the pedal to the metal and stocks are going higher or lower, it’s important. In other words, if you’re hitting on the brake extremely hard, it’s crucial, as well. It’s something to watch.

The Most Common Mistake You Want to Avoid

A lot of people try to dissect things like little bars or what does that bar mean or what is a hammer, for example. And those things are good to know, and they’re good to scan periodically to see and understand indecision and when things are topping out. 

And they’re fine. But I believe that more people emphasize that those things rather than the wide price spread bars, which are way easier to see and understand.

Looking for breakouts

This is how I look at things on a stock. Take Johnson & Johnson, for example. Let’s talk about breakouts in this case just because breakouts are more common. That’s simply because stock prices naturally go up.

Look at a descending trendline and descending pattern. Here are our trends and channel, and we look at a breakout. Initially, that first breakout was not very significant.

And we compared the wide price spread to the rest of the bars. So comparing it to the rest of the bars in the past – it’s not that big of a bar.

The width, the distance, the height of the bar is not that big. But once you start getting into the second bar and the third bar, the distance, the tallness of the bar is starting to pick up.

When you have a bar that continues to pick up speed and goes faster, and you have it on increasing volume, that’s a good sign. That’s a sign that most people don’t pay attention to; they overlook these things. You want to see when a stock moves higher.

However, when a stock pulls back, you want to see light bars. You want to see bars that don’t have a lot of wide price spread.

We’re digesting the move. And you can see those bars are just pulling back slightly, but it’s not big, and it’s not major. That means we’re just tapping on the brakes. We’re not slamming on the brakes.

And then again, as we power higher, we got a wide price spread again. What’s happening here is that buyers are stepping up to the plate. When buyers step up to the plate to buy, they drive the price higher. And as they drive the price higher, that means they’re going to stick around for quite a while.

They’re not just getting in and out of it very quickly. It means a lot of buyers are getting into it. And you can pick this on any stock that you want. 

Pro Tip: Anytime you see a significant breakout, with conviction and with the stability, it’s going to have a wide price spread probably.

There are some movements where there’s not wide price bread. And some stocks will hold up fine without wide price bread. 

However, the majority of the time pick any stock doesn’t matter what it is, it will.

Apple Stock

Look at that bar. That bar is important. Does it matter that you got it right at the breakout point?

No, you could have gotten in it a little bit later, and you still would have been fine.

That’s the thing. Anytime you have a wide price spread bar; chances are things are going to continue to run into higher prices. 

The next step is to combine that with:

  • a chart pattern 
  • resistance 
  • a channel 
  • volume 

If you have an increase in volume (like we do in some areas here), then more things line up.

The more things line up for you, the bigger the chance of success that you have. This is what you’re looking for.

How to Spot the BAD SIGN for the stock?

If we’re looking for this on the downside, the same concept applies. We’re looking for support, and the stock is starting to roll over. If this wide price spread starts to pick up to the downside, that’s not a good sign for the stock.

Instead, you want to get out of it. If we have some massive downward movement, chances are you’ll continue that follow-through.

Eventually, the distance of those bars will start to change. The colors will start to change, and that’s where you get those reversals changes or rounding bottoms. That’s how they change.

It’s not just all of a sudden, a whip back up. Sometimes it is, but often they kind of cushion themselves.

Take a Look at AMAZON 

We’re going to take a look at any breakout. 

You can do this on:

  • the daily chart
  • a weekly chart 
  • a monthly chart 

From a monthly perspective, anytime, you see the wide bars – same concept. If you’re a longer-term trader, you could look at it on a monthly chart. If you’re a shorter-term trader, you can do it on a weekly chart.

You could even do it on a daily chart. It’s nothing wrong with a daily chart. The difference here when you go to a daily chart is sometimes you get some mixed signals. That’s because you’ll have a few days that might go up and some gap up days. Those could throw you off a little bit.

For example, this would be a wide bar because, in reality, it gapped up from here and moved higher. Then you get a few little pullbacks, which as a day trader, you have to account for these slight little pullback deviations.

And then again a further move a little bit higher. That’s a couple of issues there. So even two-day, three-day charts sometimes will help clear those things up. 

  • Compare this range right here what the biggest bar is?

That’s the simple way of doing it. It’s a green bar. It’s an up day, and you got significant volume.

You can make this more complicated if you want to get more specific. You can be very detailed and analytical about it, but try to keep things simple.

Add in a level of resistance. Find our breakout point. Take a look at volume. 

  • Is there a wide price spread?

Yes!

  • Did it break a resistance level that digested for four to six weeks?

Yes!

Three things are all in line-up, and all looks good. Things should continue to move higher. And if this happened, in that case, this stock continued to move higher.

Being cautious sometimes is a smart approach.

Here, for example.

There’re resistance and volume. Is there a wide price spread? Not as much. It is a little bit on the second day more wide price spread, but I’d be a little more cautious on that one.

It’s possible, but you be a little more cautious. Two things line up. Maybe two and a half because the wide price spread is okay, but it’s not amazing. You need to be aware of the fact that every stock is different.

CMG Stock – Downside Problems

This one had some downside problems. Let’s take a look at some downside if you’re into shorting. I’ll go to weekly.

Here’s our support right there. But we already see a big wide price spread. If you take this, what are some of the biggest bars?

Point them out. Here are some of the biggest bars we had in 2014-2015. Also, here’re some bars that are very tall, and a couple of them at least more recent became red. That means you’ll probably get further downside movements.

We do have support at around 600 in the stock so if that breaks and you had wide price spread (which you did), the stock should continue to follow through.

  1. You had a break in support 
  2. Wide price spread 
  3. An increase in bearish volume 

Three things in alignment and chances are it’s going to continue moving in that direction. Eventually, you’ll get counter-trend bounces as you did with Chipotle once it hit 400. But you’re always watching where’s the volume as the wide price spread bigger in the past.

Keep in mind that the bearish days are typically larger down moves than the updates. But if you notice that the stock as it moves it starts to stall out as it heads higher, chances are you’ll continue to follow and move down.

And that’s why once you break that initial pattern and you broke it with wide price bread even though you have some counter-trend bounces there from time, that stock still continued to move lower. The natural energy was still down. And it showed you from the beginning.

Once you get the rotation, or the stock starts to roll over, you got your digestion. 

  • Again, do you have volume? 
  • Do you have a wide price spread? 
  • Do you have a break in the chart pattern?

Yes, yes, and yes.

That’s what you’re looking for. When you have things that happen and line up two or three things, you have a higher chance of success. And that’s what you want to start looking for. Most people neglect these things. They’re looking for breakouts on little things.

The Walt Disney Company

We’re looking at this 115 level. Well, they’re trying to look at it and say it broke by 115.03.

That’s not a wide price spread. You had a little normal bar, but I’d rather see here in this bar, and in this example, we had a bar going from 113 to about 115.30. When you look at that range of that bar, that bars range is about 2.3.

However, when you look at a different bar in Disney, we have this green bar that range is about $8.17.

Market volatility is different. Those kinds of things do come into play, but still, wide price spread is wide price spread. That means it is there an influx of buyers. If you have a stock that’s moving on average only $1 or $2 and it’s trying to break out on $1 to $2, that’s not necessarily stepping up with buyers.

That’s not necessarily stepping on the pedal or the gas. It’s just breaking out, and it’s fine and could work out. But it’s not a huge conviction. You might have a little volume, but again you don’t have a ton of buyers stepping up. You have a few buyers, but you don’t have a ton of them. When you’re trying to do breakouts like this, it’s better to wait for a wide price spread.

Altria Group Inc

It continues to move fairly well, and it’s doing fairly decent recently. Here you want to watch that a stock that broke out (2015, 2016) even though we had some resistance around November 2015. 

And then the stock tried to break out – it’s not a huge wide price spread. We had a little bit of movement and a breakout we had chart pattern we didn’t have a ton of volume.

If you compare the volume, it’s not there. But we did have a break in price. You can’t argue, and you can’t deny price. We had a break in price; we had a break in the chart, but there was not a lot of wide price spread. That also means we didn’t have a ton of volume.

In this case, what happened is as we broke out, we went sideways, and we continued to move a little bit higher a few months later. And then the stock pulled back again to that support level.

That wide price spread was just a small bar comparing it to maybe a few months earlier where the bar was way bigger. Maybe three times the size that had some more significance.

But in our case, we still had a breakout, we still had a break in the price of the pattern, and we still had movement into higher prices in the future. But did it move well? No, not necessarily.

It still worked out, but the wide price bread was not there. In this case, these things can still work out, but you can see that when you don’t have that conviction, you don’t have that wide price spread, you have fewer things in your favor. With less things in your favor, you have less chance of success.

Here’s my final thought: A lot of people overlook a wide price spread. They overlook it because they’re focused on chart patterns and on attaching themselves to the company. Instead, looking at the energy that the stock produces and the amount of things that could be in your alignment or in your favor is a good thing. You’re trying to watch out for those things.

If you’re driving a car down the highway and you have your oil change, your brakes are new; your tires are new, these are good news. If the car is fairly new, in good shape, and it’s been maintenance them, checked over multiple times over the last year or two, then you should be in good shape to drive cross-country.

However, if that car is very old, it hasn’t been checked, the brakes are old, the rotors are in bad shape, and you haven’t had your oil change done in 100,000 miles, you’re probably not going to get very far.

Conclusion

Having multiple things in alignment and working together gives you a better chance of success. And making sure the trade works out better and wide price spread is one of those signals that stands out that most people don’t watch for. And they should be watching.

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